The Effect of Sarbanes-Oxley Act, Essay Example

The Effect of Sarbanes-Oxley Act on Ethics in Financial Accounting

One of the most significant advances made to address a number of issues raised in recommendations by the Cohen and Treadway Commissions was the Sarbanes-Oxley Act of 2002 (Minnesota Institute of Legal Education, 2002). This act was sponsored by Paul Sarbanes of the US Senate and Michael G. Oxley of the United States House of Representatives. This act considerably improved standards for all public accounting firms, management firms and public company boards. The act had some major elements that directly address some of the issues raised in the 1974 Cohen report and the 1984 Treadway report.

The Sarbanes-Oxley Act has led to the development of a number of International Standards of Accounting (ISAs). This stems from the adoption of a number of proposals by the Cohen and Treadway commissions. These international standards of accounting provide guidelines that govern the performance and execution of the auditor function.

Despite all the efforts made by this piece of legislation, it has generally failed to curb the amount of fraudulent activity in financial reporting. The Act was meant to reinstate confidence in the capital markets by developing standards to ensure accurate financial reporting. Since the act was formulated as a reaction to two of the biggest scandals that affected the capital markets; (1) Enron, and (2) WorldCom scandals, it was mainly designed to avoid considerably catastrophic capital market scandals (Rolf, 2005).

Over the past decade, the capital market has become even more untrustworthy. This is as a result of fraudulent financial reporting activities by some of the major companies. Some of the biggest financial reporting scandals that have occurred after the passing of the Sarbanes-Oxley Act include the 2008 Bernard L. Madoff Investment Securities LLC scandal that entailed a massive Ponzi scheme (University of Maryland School of Law, 2008). In 2010, the Lehman brothers failed to disclose their repo 105 transactions to their investors.

In conclusion, the Sarbanes-Oxley Act was an instrumental piece of legislation that transformed the financial reporting platform. It drew up specific guidelines that would streamline the auditing function as well as other aspects of financial reporting. However, the act has generally failed to affect ethics in financial reporting. The act cannot prevent fraud, but is a vital standard that governs financial reporting.

References

Hess, D. (2006, October). A Business Ethics Perspective on Sarbanes Oxley and the Organizational Sentencing Guidelines. Michigan Law Review, 105(8), 1-46. Retrieved April 15, 2015, from http://deepblue.lib.umich.edu/bitstream/handle/2027.42/48727/1053-Hess.pdf&a=bi&pagenumber=1&w=100?sequence=1

Minnesota Institute of Legal Education. (2002). Sarbanes-Oxley Act of 2002 : developing new corporate practices.Minneapolis: Minnesota Institute of Legal Education.

Rolf, C. A. (2005). Efficacy of the Sarbanes-Oxley Act in Curbing Corporate Fraud. RIVIER COLLEGE ONLINE ACADEMIC JOURNAL, 1(1), 1-16. Retrieved April 15, 2015, from https://www.rivier.edu/journal/ROAJ-2005-Fall/J11-ROLF.pdf

University of Maryland School of Law. (2008). The Sarbanes-Oxley Act of 2002 : assessing its impact, charting its future.Baltimore, MD: University of Maryland School of Law. Retrieved April 15, 2015, from http://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=1072&context=jbtl